Do Programs Mandating Small Business Lending Disincentivize Growth? Evidence From A Policy Experiment

Author(s) Gursharan Bhue, Nagpurnanand Prabhala, Prasanna Tantri

ABSTRACT

Exploiting discontinuities in program eligibility, we show that small-firm lending mandates inhibit firm growth. Newly eligible firms near the upper threshold for treatment slow investment, sales, and a non-accounting measure, power consumption. The effects are more pronounced for more constrained firms and those borrowing from banks away from their lending targets. Establishment level data show similar program-induced distortions in firm size. Our results suggest that financial constraints matter: firms give up growth to retain credit access. However, lending mandates alter growth trajectories by pushing target firms to remain small to retain financing eligibility or so banks can meet statutory targets.